Apple, Publishers Battle New E-book Antitrust Claims

By Andrew Albanese
|

Mar 26, 2014

In two January motions, Apple and the five major publishers involved in a 2010 e-book price-fixing conspiracy asked Judge Denise Cote to dismiss a follow-up suit from an Australian e-book retailer that claimed its business was destroyed by the 2010 agency switch. But since March 14, two new plaintiffs have joined the action, raising the possibility of another legal front opening in the e-book antitrust battle—this one involving aggrieved retailers.

In DNAML vs. Apple Inc. et al, filed in September, 2013, the upstart Australian e-book retailer alleges the company was harmed "directly and as a proximate result" of the 2010 price-fixing scheme executed by Apple and the five agency publishers (Hachette, HarperCollins, Simon & Schuster, Macmillan and Penguin). Now, this month, two related cases have been accepted by Cote: one filed by Lavoho, LLC, a "successor" to the Diesel eBook Store; and another from Abbey House Media, formerly BooksonBoard.

The most recent suits offer virtually identical claims to DNAML's 2013 suit—that the 2010 agency switch destroyed the retailers' ability to compete on price. All three plaintiffs share representation, and according to a letter filed by plaintiff attorneys after a January 2014 conference, the plaintiffs expect the cases to be consolidated.

That is, if the cases continue. In a January 17 joint motion to dismiss, the five publishers urged Judge Cote to toss the DNAML suit. "DNAML does nothing more than copy and paste the Department of Justice's allegations," the publishers argue, "and claim 'me too.'" Apple has also filed a motion to dismiss DNAML's claims.

All three plaintiffs are represented (at least in part) by attorney Max Blecher, who ironically represented three independent booksellers in a recent suit that claimed the "big six" publishers were in a conspiracy with Amazon. Judge Jed Rakoff dismissed that case in December, 2013, citing a lack of evidence and "no plausible motive."

Collateral Damage?

The suits contain nearly identical preambles detailing Apple's liability finding by Judge Cote, and they press nearly identical claims: that the illegal collusion between Apple and the publishers ended the retailers' ability to bundle, discount, promote or otherwise engage in retail price competition, thus destroying each nascent e-book business. In each complaint, the plaintiffs were said to have business models "predicated on aggressive price competition."

Prior to entering the e-book retail business, DNAML had been "involved in the e-book industry for over a decade, primarily as a software developer," the complaint states. Its retail business was built around "discounted bundling," including offering free e-books with other digital products. "DNAML expected to grow rapidly," the suit claims, thanks in part to "extremely recognizable domain names that brought it considerable internet traffic, particularly www.eBook.com."

Founded in 2006 by Bob LiVolsi, BooksOnBoard's business model was based on "aggressively pricing a wide selection of e-books" as well as a rewards program designed to develop customer loyalty. "Given BooksOnBoard's favorable growth pattern and increasing popularity with consumers, it received a valuation of $6 million based on funding it raised in June 2009," the suit claims.

The Diesel e-bookstore (now Lovoho), was founded in 2005 by Scott Redford. It claims to have offered over three million titles and "the cornerstone" of its business model was also discounted bundling, including "proprietary software that would allow its e-bookstore to 'shrink wrap' up to six digital e-books and sell them as a bundle to the consumer." Diesel also offered a rewards program. Diesel had enjoyed steady growth "every single year," the suit claims, with "modest profits" and a "large expansion" planned for 2011.

Everything suddenly changed, however, after the agency switch in 2010. Each suit claims the plaintiffs "did not want to agree to the agency agreements," but "had virtually no choice but to sign them" if they wanted to sell the publishers' books.

A similar phrase in each suit notes that even if the plaintiffs could have "somehow convinced one of the Publisher Defendants to allow it to drop below the tiered prices, the series of MFN clauses would still have insulated Apple from price competition."

Just as Amazon was forced to raise prices, the suits claim, each of the plaintiffs was "forced to stop discounting its prices and cease using its already developed discount-driven promotional tools."

This was "the coup de grace to DNAML 's business," the DNAML complaint notes.

BooksOnBoard lost "80% of its active customers" as "a direct result of the conspiracy," its suit claims. After the agency switch, the company's "years of steady growth abruptly ceased" and its revenue and profit plunged. "Two years after receiving a valuation of $6 million, BooksOnBoard received an offer for $600,000, a 90% percent drop in value." It ceased operations on April 6, 2013.

Diesel (now Lovoho), claims it was working with "an interested software company" on a multimillion dollar "social e-book reader which would have been Diesel branded." But after "the Defendants forced the industry to change to agency," Diesel's business model was "decimated" and its "potential suitor" walked.

"The primary incentive to purchase an e-book from Diesel over Amazon, Apple, or Barnes & Noble was Diesel's favorable pricing, bundling, and rewards program," the suit claims. "When Defendants eliminated Diesel's ability to offer consumers these perks, Diesel's ability to compete was crippled." Diesel announced this week that it will cease operations at the end of March, 2014.

The suits ask for Apple and the five publishers to pay damages and attorney's fees and costs for the harm their conspiracy caused.

Next steps?

At first glance, the complaints tell quite a story of crushed competition. And they add a new narrative: the agency switch was supposed to help retailers, and was strongly supported by retailers like Barnes & Noble, and Kobo, who were unable to compete with Amazon on price. But as his business struggled last year, BooksOnBoard's Livolsi told PW the agency switch was a "misguided move" organized to benefit the big retail players, but “devastated” independent e-book sellers. "Publishers just didn’t think about how this would affect distribution,” he said.

Still, it remains to be seen how far the cases will progress. After all, would-be digital publishing competitors launch and flop all the time, for many reasons.

Accordingly, in their joint brief to dismiss the DNAML complaint, the publishers question DNAML's legitimacy, describing them as a "small, one person, Australian software company" with "no e-reader, no App, and nothing else to distinguish it from the already established competitors in the space, including Amazon and Barnes & Noble."

While the DNAML complaint cites an alleged conspiracy to raise e-book prices for consumers, the publishers argue that as "as an e-book seller, DNAML would have enjoyed higher margins under agency," and therefore benefited. Thus "any purported injury to DNAML from the move to agency is "both remote and not plausibly alleged."

Further, given DNAML's low profile, any asserted damages from the conspiracy would be highly speculative. "The Complaint requires the Court to ignore the actual causes of DNAML's demise and adopt DNAML's implausible narrative," the publishers argue, labeling the company again a "one-man shop that failed to even create an iPad App more than a year after the iPad's launch."

The publishers also call out what it labels DNAML's "false and internally inconsistent" allegations. For example, the DNAML complaint "erroneously (and repeatedly)" alleges that each of the publishers "forced" an agency agreement onto DNAML, but only one of the major publishers had actually entered into an agency agreement with DNAML, and only two of the publishers had prior previous wholesale deals with the company.

And finally, even if the alleged conspiracy was true, publishers say, consumers were the true victims, and consumers have "already have obtained redress" in the form of an injunction and more than $166 million in restitution from the publisher settlements.

PW has integrated its print and digital subscriptions, offering exciting new benefits to subscribers, who are now entitled to both the print edition and the digital editions of PW (online or via our app). For instructions on how to set up your accout for digital access, click here. For more information, click here.

The part of the site you are trying to access is now available to subscribers only. Subscribers: to set up your digital subscription with the new system (if you have not done so already), click here. To subscribe, click here.

Thank you for visiting Publishers Weekly. There are 3 possible reasons you were unable to login and get access our premium online pages.

You are NOT a current subscriber to Publishers Weekly magazine. To get immediate access to all of our Premium Digital Content try a monthly subscription for as little as $18.95 per month. You may cancel at any time with no questions asked. Click here for details about Publishers Weekly’s monthly subscription plans.

You are a subscriber but you have not yet set up your account for premium online access.Add your preferred email address and password to your account.

You forgot your password and you need to retrieve it. Click here to access the password we have on file for you.